GILLETTE, Wyo. — Powder River Basin mines get coal out of the ground cheaper than just about anyone, and have pushed that cost even lower in recent months.
As demand for coal has slowed its growth and the market has weakened, analysts say hammering down costs has become more of a priority. Every operator in the basin has cut operating and capital spending compared to the first part of the year or last year, and costs are generally headed down — even as the coal seam, by and large, gets deeper and more difficult to mine.
Mines have cut costs by making equipment last longer and by doing more in-house maintenance, said Brandon Blossman, an analyst for Tudor Pickering & Holt Co. Those cuts won’t last long-term, but also aren’t going to go away tomorrow, he told the Gillette News-Record.
“The thing there that makes it — not sustainable over a decade, but sustainable over the shorter term — is folks are doing, it sounds like, more in-house maintenance — extending the life of existing machinery versus buying new machinery,” Blossman said. “Essentially, just tightening their belt and doing whatever they can to make what they have last longer and to maintain it with fewer contractors and more in-house folks.”
In the latest round of required financial statements to the Securities Exchange Commission, all of the companies in the basin that have reported so far have reported cuts to operating and/or capital costs — two measures that represent some of the actual costs of mining.
That has allowed the mines to generally keep losses lower than analyst expectations in the past few months.
—Peabody Energy cut the low end of its capital spending projections by more than half from $450 million in 2013, and cut more than 40 cents out of its operating costs per ton of production for the first half of the year at its Western mines compared to 2013. It finished the quarter with a $73.3 million loss, meeting or slightly beating expectations.
—Cloud Peak Energy also cut its capital spending projections by half from $60 million in 2013, and cut operating costs by about 3 percent compared to the first half of last year. It finished the quarter with a $2.1 million loss, strongly ahead of expectations.
—Arch Coal cut its capital spending projection by about 40 percent from $280 million in 2013. Its operating costs went up slightly compared to the first half of last year, but are down from two years ago and for the second quarter compared to the first quarter of this year. It lost $96.9 million in the quarter, also beating expectations.
Tightening margins industry-wide have driven operators to focus more on controlling costs than in the past, Blossman said.
“It is more important than it used to be,” Blossman said. “Very big picture, global coal production has been fighting to keep up with demand for the last 10, maybe even 15 years. So your focus has been not on costs as much but on increasing production, and costs are secondary. That has changed.”
In addition to doing more in-house maintenance, mines have gotten smarter over time about maintenance, industry consultant Bob Burnham said. Recently more mines have moved toward indicated maintenance rather than regular scheduled maintenance, Burnham said.
In terms of an oil change for a passenger car, it would mean testing the oil at regular intervals and changing it when something from the test indicates a need for new oil, rather than changing it at regular intervals regardless of if it really needs to be changed.
Just like personal spending, mines tend to spend more when times are good, Burnham said.
“When you’re flush for money and you can go out and spend a little extra just because things are more convenient, you tend to do it,” Burnham said. “You say, ‘Hey, I’m doing fairly well. Instead of replacing the motor on my car I’ll go buy a new car.'”
When large mines start making incremental cost savings, little changes go a long way, he said.
“When you’ve got a 100 million ton-a-year mine, if you can save a penny a ton, you’ve saved a lot of money,” Burnham said.
The coal seam through the Powder River Basin is the thickest mineable seam in the world, and it generally dips deeper toward the west. Mines start at the shallowest and cheapest places, so the rule is that costs go up as a mine progresses to the west.
Cloud Peak Energy CEO Collin Marshall said the company will continue to focus on cutting costs it can control, including maintenance and capital spending, as other costs go up.
“We’ll be very focused on maintaining all of the cost reductions that we can through the business and we’ll be looking at the normal increases that we would expect as the mines do get further away and the strip ratio increases on a natural basis,” Marshall said.